ANALYSIS-Canada auto sector may shrink without labor concessions

September 14, 2012|Reuters

The surge in the value of the Canadian dollar against theU.S. dollar over the past decade, and its impact on raising thecost of vehicle production, is the single biggest factorweighing on labor talks, said Doug Porter, deputy chiefeconomist at BMO Capital Markets.

"If the currency was at 80 cents or lower, I am surenegotiations would be much smoother," Porter said, noting thatCanada's highest level of auto production was between 1999 and2001, when the currency was near record lows at around 62 U.S.cents. It was trading on Friday at US$1.03.

Economists expect the Canadian dollar to stay near paritywith the U.S. dollar for the next several years, offering littlerelief for the auto companies and their Canadian workers anytime soon.

To be sure, Canada's auto sector no longer provides the CAWwith the muscle it once did in contract talks.

Since the late 1990s, when auto assembly and employmentpeaked, the Detroit Three have closed five assembly plants inCanada. The only new auto factory to open in Canada was Toyota'sWoodstock, Ontario, facility in 2008.

Employment in the auto assembly sector is down by a third inthat period and Canada's share of continental production hasdropped from near 18 percent to around 16 percent, with Mexicobeing the main beneficiary, according to the CAW.

Automotive data and analysis group WardsAuto expects thatCanada's light-vehicle output will hold steady - at best - overthe next six years as North American automakers put the bulk ofnew capacity in Mexico and invest in existing facilities in theUnited States.

"SCARY" CUTS

The CAW has lobbied the federal and provincial governmentsto adopt policies to better protect the auto sector, but thecurrent government's track record of favoring free-marketpolicies suggests little likelihood of success.

"Without government intervention in the form of a strongauto policy, an industrial-based policy that supports ourindustry, things do look bleak," said Chris Buckley, presidentof the CAW General Motors Local 222 in Oshawa, Ontario.

GM had said earlier this year it would close an assemblyline in Oshawa that would put about 2,000 CAW members out ofwork.

That announcement was particularly "scary" given theunder-utilization of the 8 million-square-foot facility, Buckleysaid. "That makes me nervous. It really does. Because companieswill do better if they fully utilize their facilities."

NO SWIFT OR COMPLETE EXIT

Although the possibility of the Detroit Three movingproduction elsewhere is very real, analysts say they don'texpect them to pull up roots completely. That is especially truefor Chrysler, which produces a quarter of its North Americanoutput in Canada.

"Chrysler does very well in Canada. They don't want to gotoo far to turn off the consumer," said Haig Stoddard, anindustry analyst at Michigan-based WardsAuto.

Even moving some production is easier said than done. Atypical auto assembly plant costs upwards of $1 billion to buildand fit with equipment, Faria said, and retooling a plant cancost more than $500 million. What's more, the process can take acouple of years.

"They can't pick up and leave overnight, but that's not thepoint. The point is they can leave. It may take a few years, butthey can leave," Faria said.